More QE means more headaches for Asia

A jump of 56.9 from 54 in the ISM Index might mean good news for the West, but does not bode well for Asia.

In a statement, HSBC said that while the larger economies of China and India have seen a pick-up in momentum, smaller, more trade dependent markets, notably Korea and Taiwan, but also Japan (not small, but arguably trade dependent), have seen PMIs drop in October. The same holds true for new orders, which were down in Korea and Japan, although they are starting to stabilize in Taiwan.

Frederic Neumann, Co-Head of Asian Economics Research, said, “The latest round of PMIs indicates that the regional industrial engine is running at comfortable speed. Consumers keep spending at a near unprecedented pace. Sure, some markets like Singapore and Taiwan have seen shipments wobble of late. But Korea's record exports in October, the first to report in the region, suggest that this is more of a blip. Here's the hitch: price pressures are growing. Fast. In due course, officials will find out that monetary policy still works, just not always in the particular economy where it's supposed to.”

The bank also said that while real retail sales growth will likely slow sequentially, a collapse is not imminent— job creation remains positive. “Moreover, our regional employment index was dragged down by a sub-50 reading of the HSBC China PMI index in October, which we suspect is a blip (note the NBS measure remained in solidly positive territory at 52.1),” it said.

The positive news, however, comes with major risks attached. Price pressures are growing. While various PMIs have experienced growth, firms have yet to pass on the costs, which means that higher raw material costs haven't affected CPI readings all too much yet.

“Businesses have absorbed rising input costs and seen their margins deteriorate… As demand continues to strengthen, firms may raise prices after all, pushing up CPI readings, even at the core level, faster than one would like,” HSBC said.

The bank also warned of more inflation surprises, saying they will happen "not just at the headline level, which central bankers can easily shrug off as a supply shock. What will happen with another round of quantitative easing by the Fed? It's creating inflation, alright. Just not necessarily in the US, but on the other side of the globe.”